In the debate over who should be the next mayor of Los Angeles, who would you suppose argues for elimination of a business tax to kick-start economic growth?
Not the one-time investment banker who dropped out of the race early and says killing the business tax would leave a huge hole in the city treasury. Not the lone Republican in the field, who wants more modest business tax reform. Not a City Council fiscal hawk, also a candidate for mayor, who says cutting the tax could leave the city with a $400-million shortfall.
Instead it's two liberal Democrats — City Controller Wendy Greuel and Councilman Eric Garcetti — pushing what sounds a lot like Ronald Reagan- or Mitt Romney-style "supply side" fiscal dogma. Cut taxes for business, Garcetti and Greuel contend, and the overall economic pie will grow, with benefits trickling down in the form of more jobs for Angelenos and more money in the city's general fund.
The duo's insistence on ending the tax on businesses' gross receipts puts them at odds with not only Democratic Party orthodoxy nationally but also with several figures viewed as leading watchdogs on municipal finance — former deputy mayor and investment banker Austin Beutner, Los Angeles County Supervisor Zev Yaroslavsky and Miguel Santana, the city's top budget official.
"It's an interesting strategy, but there is no proposal of what we would do to backfill the loss of that revenue," says Councilwoman Jan Perry, a mayoral candidate and among the more conservative city lawmakers on financial matters. "Who makes up the difference?"
Political observers believe that Garcetti and Greuel, both of whom have been identified as allies of organized labor, offer the elimination of the tax, at least in part, as a signal to the business community that they have more than one dimension.
"Mayoral candidates have to court business," said Jack Pitney, professor of government at Claremont McKenna College. "There is a widespread perception that L.A. is not business friendly and anyone who aspires to be mayor has to fight that perception."
But will lost revenue from killing the tax be made up from other sources?
"It's rare that a tax cut actually pays for itself," Pitney said. "The best kind of tax cut is the kind that raises revenue and that actually has happened from time to time. It's not impossible. But the more reasonable prediction is it might end up losing less revenue than one would think otherwise."
Greuel and Garcetti reject what they say is conventional thinking. Both say they have seen the benefits of previous business tax cuts, with employers coming to the city after they were granted relief from the levy, currently the highest of its kind in Los Angeles County. They also say they would phase out the tax incrementally and only as it proved to help the city's bottom line.
It's another irony of the tax debate that Garcetti and Greuel — sharp rivals and perceived front-runners in the race to replace Mayor Antonio Villaraigosa — have worked closely on previous reforms of the business levy and agree on the need for its elimination.
Greuel calls herself the "architect" of business tax reform, pointing to a 2006 council vote she led that cut the rate 15% over several years and reduced the number of tax categories from 42 to fewer than 10. The controller said the 2006 rate reduction not only brought in more businesses but that the city government also "saw more revenue as it related to those businesses coming into Los Angeles."
City budget officials say, however, that the previous tax changes came during a time of economic growth and they can't tease out how much of those increases accumulated because of the natural business cycle versus the city's tax cut.
Critics say that the incremental rate reductions of the past offer no proof that the revenue lost from wholesale elimination of the tax could be replaced. The debate has been complicated by the conflicting analysis of experts hired by the city.
In 2011, USC accounting professor Charles Swenson issued a report that found the death of the business tax would provoke such strong growth that the city would more than recoup the $400 million in lost revenue with the expansion of other taxes.
Last year, the city hired a consulting firm that picked apart Swenson's analysis, concluding that business would expand but that little of the tax revenue would be recouped from other sources. That is the prevailing view of Santana, the city's administrative officer, and outsiders like Beutner, the businessman who worked for a year and a half as Mayor Antonio Villaraigosa's "jobs czar."
Beutner said that in his time working at City Hall businesses most commonly complained about regulatory delays and the uncertainty of doing business in Los Angeles.
"They talked about how hard it was to get a permit, how anti-business the city is in its attitude," Beutner said. "Waving a magic wand and reducing a tax rate doesn't address those other issues."
Los Angeles only receives a fraction of property and sales taxes and other levies, but it receives 100% of every dollar brought in by its gross receipts tax, which charges businesses roughly one-tenth of a cent to half a penny per dollar of revenue.
Those tiny incremental payments add up, Beutner said. "So if you take a whole dollar in those taxes away, please show me how I get that dollar back with pennies from these other taxes," said Beutner. "It's not enough to just say, 'The whole pie grows.' Here you have a couple of progressives … espousing trickle-down. And this is the most indirect form of trickle-down one can imagine."
Garcetti agreed that many factors influence where companies make their homes, but he said "not a week goes by" that he doesn't have executives complain about L.A.'s gross receipts tax. Online retailer Shopzilla and ratings company Nielsen decided they could stay in Los Angeles, but only after getting a break on the tax, the councilman said. Online law document service Legal Zoom, in contrast, fled for Glendale and its lower rents and business levy. The company bolstered its bottom line by a few million dollars because of Glendale's lower tax, Garcetti said.
Greuel and Garcetti said they would phase out the tax over 15 years, only proceeding with incremental cuts each year if other tax revenues increased enough to make up for the money lost from the business levy. "Its not a Republican or Democratic issue," Greuel said. "It's about being responsible and being business-friendly."
Garcetti said he is a bit surprised at how his position on the tax has evolved.
"I started someplace else ideologically until I saw the impact this tax had," he said. Before, "I would have absolutely been a skeptic of things like this" tax cut, he added. "I realize [now] there are smart taxes and there are dumb taxes. This is a dumb tax."
Times staff writer Michael Finnegan contributed to this report.Copyright © 2014, Los Angeles Times